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New Compensation Cap for Federal Contractors

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Written By: Matt Stringfellow, CPA

The administration has published an interim rule to limit the reimbursement ceiling for executives of federal contractors to $487,000 per year. According to the interim rule published in the June 24 Federal Register, the new limit applies to compensation for all contractor and subcontractor employees for contracts awarded, and costs incurred, on or after June 24, 2014. Compensation is not limited to salaries, but includes all components of compensation (e.g. bonuses, deferred compensation, etc.).

Currently, the statutory limit is set by law based on a formula and the most recent upper limit was set at approximately $952,000. In truth, that limit was only available to the very largest of federal contractors (estimated to be about .4% of federal contractors) as other regulations also apply limits based on the size of companies (e.g. based on revenues and staff size). However, this highlights a trend by the government and federal worker unions to continue to limit spending to federal contractors.
In fact, federal workers unions have stated that in their view, the new rule has not gone far enough, they would argue that the limit should be set around $237,000 or the level of the vice president’s salary on an annual basis.

The administration has stated that these measures are part of an ongoing effort the buy smarter and end wasteful spending as part of a fiscally prudent strategy. They believe that imposing these limits will save the government hundreds of millions of dollars a year in reduced payments to federal contractors.

The proposal does not limit the amount that contractors can pay to their executives; it only limits how much the government is willing to reimburse the contractors for the services of those executives.
TJS Deemer Dana LLP’s AEC team will continue to monitor these changes on an ongoing basis. Feel free to reach us with any questions.

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